On November 15, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Indonesia.

Over the past decade, Indonesia has established a track record of strong economic performance and resiliency, underpinned by sound macroeconomic management and corporate and banking sector reforms. In recent years, its economy has benefitted from a supportive global economic environment, namely in the form of a rise in commodity prices and strong growth in emerging markets. However, these conditions have been less supportive lately, resulting in slowing export growth. Combined with rising net oil and gas imports, the current account shifted into a deficit in 2012. Nonetheless, real GDP growth in 2012 remained strong at 6¼ percent, aided by domestic conditions, while inflationary pressures stayed low.

Going forward, the near-term outlook reflects the more challenging global environment that Indonesia faces. Growth is projected to slow to around 5−5½ percent in 2013 and 2014 on weaker investment and external demand. Inflation is expected to reach 9½ percent (year-on-year) in 2013, owing to fuel and food price increases and the recent rupiah depreciation, before easing back to around 6 percent in 2014. The current account deficit is projected to remain above 3 percent of GDP in 2013 and 2014, mainly on account of a weakening in the terms of trade and measured growth in external demand. Foreign direct investment and net portfolio inflows are expected to moderate but still be supportive, notwithstanding heightened market volatility since mid 2013 associated with prospects of an end to unconventional monetary policies in the United States. Despite a drawdown in the first half of 2013, reserves are expected to remain adequate.

The authorities have taken significant steps since mid 2013 to address external and fiscal imbalances, ease inflation pressures, and reduce market volatility. Fiscal performance has been aided by a hike in subsidized fuel prices in June, to check the rise in energy subsidies, while monetary policy has been tightened through a substantial increase in policy rates. To ensure an orderly adjustment, exchange rates and bond yields have moved to reflect market conditions. Other measures have aimed at strengthening the supply side of the economy. Contingent financing arrangements have also been put in place to help cushion the impact of any new shocks or prolonged market disruptions.

Banks remain well capitalized and highly profitable, having been supported in recent years by strong economic growth and wide interest margins. Asset quality has continued to be strong. Along with monetary policy actions, macro-prudential measures have been taken to slow credit growth, but loan-to-deposit ratios have continued to rise. The ongoing transition of bank supervision and regulation from Bank Indonesia to Otoritas Jasa Keuangan (the financial services agency) continues as planned. At the same time, gaps remain in the crisis management framework, which are expected to be filled by a financial sector safety net law when approved by parliament.

Executive Directors noted the authorities’ strong track record of prudent macroeconomic policies and commended their efforts to contain external and fiscal imbalances, reduce inflation, and manage market volatility in the wake of recent external shocks. Looking ahead, Directors encouraged the authorities to strengthen the resilience of the Indonesian economy by rebuilding policy buffers, addressing emerging vulnerabilities, and stepping up structural reforms.

Directors welcomed the actions taken by the authorities to tighten monetary policy. They agreed that additional monetary tightening might be necessary to facilitate balance-of-payments adjustment and better anchor inflation expectations. In this regard, Directors supported efforts to strengthen the monetary transmission mechanism and develop the money and foreign exchange markets to improve liquidity management. Directors also underscored the importance of continued exchange rate flexibility to dampen the impact of external shocks.

Directors considered that fiscal policy should support the orientation of monetary policy, and generally agreed that a moderate consolidation would be appropriate for the period ahead. Measures should include bolstering tax collection and sustaining energy subsidy reform in the context of well-targeted safety nets. Directors also highlighted the importance of opening up fiscal space for infrastructure investment to lift longer-term growth prospects.

Directors commended steady advances in ensuring the soundness of the domestic financial system. Implementation of pending recommendations under the Fund’s Financial Sector Assessment Program (FSAP), notably as regards the quality of banks’ capital, would cement the progress thus far. More broadly, Directors stressed the importance of avoiding oversight gaps in the transition to a new supervisory architecture, and of putting in place an effective crisis management framework. Directors also encouraged the authorities to address remaining deficiencies in the regime for the prevention of money laundering and terrorism financing.

Directors agreed that reforms to reduce supply bottlenecks, enhance the business climate, increase labor market flexibility, and open up trade and investment remain key to strengthening competitiveness and the external position, and to bolstering growth and employment. They took note of the staff’s assessment that Indonesia’s external position appears to be moderately weaker than implied by medium-term fundamentals.

Indonesia: Selected Economic Indicators, 2008–14

2008

2009

2010

2011

2012

2013

2014

Est.

Proj.

Proj.

Real GDP (percent change)

6.0

4.6

6.2

6.5

6.2

5.4

5.3

Domestic demand

7.6

5.2

5.4

6.1

8.2

5.0

4.9

Of which:

Private consumption

5.3

4.9

4.7

4.7

5.3

5.2

4.8

Gross fixed investment

11.9

3.3

8.5

8.8

9.8

5.0

4.0

Change in stocks 1/

0.1

-0.2

0.1

0.4

1.8

-0.4

-2.0

Net exports 1/

0.7

1.2

0.9

1.5

-1.5

1.1

1.2

Saving and investment (in percent of GDP)

Gross investment 2/

27.8

31.0

32.3

32.9

35.3

34.6

33.8

Gross national saving

27.8

33.0

33.0

33.1

32.5

31.1

30.6

Foreign saving (external current account balance)

0.0

-2.0

-0.7

-0.2

2.8

3.5

3.2

Prices (12-month percent change)

Consumer prices (end period)

11.1

2.8

7.0

3.8

4.3

9.5

6.0

Consumer prices (period average)

9.8

4.8

5.1

5.4

4.3

7.2

7.6

Public finances (in percent of GDP)

Central government revenue

19.8

15.1

15.8

16.1

16.2

16.0

16.0

Central government expenditure

19.9

16.7

16.4

17.3

18.1

18.4

18.5

Central government balance

-0.1

-1.6

-0.6

-1.1

-1.9

-2.5

-2.5

Primary balance

1.7

0.1

0.8

0.1

-0.6

-1.1

-0.9

Central government debt

33.2

28.6

26.8

24.4

24.5

26.2

26.8

Money and credit (12-month percent change; end of period)

Rupiah M2

12.7

13.8

16.5

17.4

14.4

...

…

Base money

-9.2

16.7

28.9

18.3

14.9

...

…

Private sector credit

30.5

7.2

19.6

25.4

22.3

...

…

One-month interbank rate (period average)

9.1

7.4

6.4

6.2

4.4

…

…

Balance of payments (in billions of U.S. dollars)

Oil and gas (net)

7.8

5.4

3.2

-0.7

-5.2

-10.9

-14.3

Non-oil and gas exports (f.o.b.)

107.9

99.0

129.4

162.7

152.9

150.7

159.8

Non-oil and gas imports (f.o.b.)

92.8

73.5

102.0

127.3

139.1

134.4

137.8

Current account balance

0.1

10.6

5.1

1.7

-24.4

-30.4

-27.6

Inward direct investment

9.3

4.9

13.8

19.2

19.4

16.5

17.1

Overall balance

-1.9

12.5

30.3

11.9

0.2

-17.2

-9.0

Gross reserves

In billions of U.S. dollars (end period)

51.6

66.1

96.2

110.1

112.8

88.7

79.7

In months of imports of goods and services

5.6

5.2

5.9

6.2

6.4

4.9

4.1

As a percent of short-term debt 3/

175.0

208.7

224.2

235.5

206.4

154.6

131.6

Total external debt 4/

In billions of U.S. dollars

155.1

172.9

202.4

225.4

252.4

264.6

277.3

In percent of GDP

30.4

32.1

28.5

26.6

28.7

30.3

32.2

Exchange rate (period average)

Rupiah per U.S. dollar

9,687

10,405

9,086

8,772

9,381

…

…

Nominal effective exchange rate (2005=100)

90.8

86.6

95.2

93.5

89.1

…

…

Real effective exchange rate (2005=100)

110.0

109.8

124.2

124.6

120.8

…

…

Memorandum items:

Oil production (thousands of barrels (bbls) per day)

976

949

945

907

860

830

830

Indonesian oil price (in US$ per bbl.)

97.0

61.6

79.4

111.5

112.7

109.4

105.3

Nominal GDP (in trillions of rupiah)

4,949

5,606

6,447

7,423

8,242

9,102

10,123

Nominal GDP (in billions of U.S. dollars)

511

539

710

846

879

…

…

Sources: Data provided by the Indonesian authorities; and IMF staff estimates and projections.

1/ Contribution to GDP growth (percentage points).

2/ Includes changes in stocks.

3/ Short-term debt on a remaining maturity basis.

4/ Public and private external debt.

Indonesia: Selected Economic Indicators, 2008–14

2008

2009

2010

2011

2012

2013

2014

Est.

Proj.

Proj.

Real GDP (percent change)

6.0

4.6

6.2

6.5

6.2

5.4

5.3

Domestic demand

7.6

5.2

5.4

6.1

8.2

5.0

4.9

Of which:

Private consumption

5.3

4.9

4.7

4.7

5.3

5.2

4.8

Gross fixed investment

11.9

3.3

8.5

8.8

9.8

5.0

4.0

Change in stocks 1/

0.1

-0.2

0.1

0.4

1.8

-0.4

-2.0

Net exports 1/

0.7

1.2

0.9

1.5

-1.5

1.1

1.2

Saving and investment (in percent of GDP)

Gross investment 2/

27.8

31.0

32.3

32.9

35.3

34.6

33.8

Gross national saving

27.8

33.0

33.0

33.1

32.5

31.1

30.6

Foreign saving (external current account balance)

0.0

-2.0

-0.7

-0.2

2.8

3.5

3.2

Prices (12-month percent change)

Consumer prices (end period)

11.1

2.8

7.0

3.8

4.3

9.5

6.0

Consumer prices (period average)

9.8

4.8

5.1

5.4

4.3

7.2

7.6

Public finances (in percent of GDP)

Central government revenue

19.8

15.1

15.8

16.1

16.2

16.0

16.0

Central government expenditure

19.9

16.7

16.4

17.3

18.1

18.4

18.5

Central government balance

-0.1

-1.6

-0.6

-1.1

-1.9

-2.5

-2.5

Primary balance

1.7

0.1

0.8

0.1

-0.6

-1.1

-0.9

Central government debt

33.2

28.6

26.8

24.4

24.5

26.2

26.8

Money and credit (12-month percent change; end of period)

Rupiah M2

12.7

13.8

16.5

17.4

14.4

...

…

Base money

-9.2

16.7

28.9

18.3

14.9

...

…

Private sector credit

30.5

7.2

19.6

25.4

22.3

...

…

One-month interbank rate (period average)

9.1

7.4

6.4

6.2

4.4

…

…

Balance of payments (in billions of U.S. dollars)

Oil and gas (net)

7.8

5.4

3.2

-0.7

-5.2

-10.9

-14.3

Non-oil and gas exports (f.o.b.)

107.9

99.0

129.4

162.7

152.9

150.7

159.8

Non-oil and gas imports (f.o.b.)

92.8

73.5

102.0

127.3

139.1

134.4

137.8

Current account balance

0.1

10.6

5.1

1.7

-24.4

-30.4

-27.6

Inward direct investment

9.3

4.9

13.8

19.2

19.4

16.5

17.1

Overall balance

-1.9

12.5

30.3

11.9

0.2

-17.2

-9.0

Gross reserves

In billions of U.S. dollars (end period)

51.6

66.1

96.2

110.1

112.8

88.7

79.7

In months of imports of goods and services

5.6

5.2

5.9

6.2

6.4

4.9

4.1

As a percent of short-term debt 3/

175.0

208.7

224.2

235.5

206.4

154.6

131.6

Total external debt 4/

In billions of U.S. dollars

155.1

172.9

202.4

225.4

252.4

264.6

277.3

In percent of GDP

30.4

32.1

28.5

26.6

28.7

30.3

32.2

Exchange rate (period average)

Rupiah per U.S. dollar

9,687

10,405

9,086

8,772

9,381

…

…

Nominal effective exchange rate (2005=100)

90.8

86.6

95.2

93.5

89.1

…

…

Real effective exchange rate (2005=100)

110.0

109.8

124.2

124.6

120.8

…

…

Memorandum items:

Oil production (thousands of barrels (bbls) per day)

976

949

945

907

860

830

830

Indonesian oil price (in US$ per bbl.)

97.0

61.6

79.4

111.5

112.7

109.4

105.3

Nominal GDP (in trillions of rupiah)

4,949

5,606

6,447

7,423

8,242

9,102

10,123

Nominal GDP (in billions of U.S. dollars)

511

539

710

846

879

…

…

Sources: Data provided by the Indonesian authorities; and IMF staff estimates and projections.

1/ Contribution to GDP growth (percentage points).

2/ Includes changes in stocks.

3/ Short-term debt on a remaining maturity basis.

4/ Public and private external debt.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

2 At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.